Sembcorp coal deal raises concerns over green bond distortions

Sembcorp Industries shareholders have approved the $1.5 billion sale of its Indian coal-fired power plants in a deal that allows the Singapore-based company to avoid higher interest payments on its green debt, even if it retains liabilities in polluting assets.

Sembcorp, an energy supplier, agreed to divest the assets to a private Omani consortium to reduce its greenhouse gas emissions and avoid triggering higher coupons on its sustainability-related debt.

As part of the deal, he will also finance the assets for the next 15 years, as he said restrictions on non-green investments would mean any buyer could find it difficult to secure finance for the coal.

This unusual arrangement is being watched closely for signs that the nascent sustainability bond market could incentivize distortions in how companies manage high-emission assets. Sembcorp’s decision also raises the question of whether sustainability performance targets should include both operational and funded emissions, and comes as world leaders gather for the COP27 climate summit in Egypt.

Sembcorp, in which Singaporean public investment firm Temasek has a 49.5% stake, said the sale was a key part of its green energy transition strategy.

Its emissions intensity will then drop from 0.51 tonnes of carbon dioxide equivalent per megawatt-hour to 0.32 tonnes, comfortably within its target of 0.4 tonnes by 2025. However, the sale will also mean that Sembcorp will avoid pay additional interest on about 975 million Singapore dollars ($695 million). ) in 2021 of sustainability-related debt.

Sustainability bonds are tied to goals such as reducing carbon emissions. The cost of failure for the issuer is higher borrowing costs, which induces it to reduce its emissions on the balance sheet. The International Finance Corporation (IFC), the private sector investment arm of the World Bank Group, was an anchor investor in Sembcorp’s S$675 million sustainability bond. BlackRock did not respond to a request for comment.

The Anthropocene Fixed Income Institute (AFII), a climate-focused nonprofit, called the deal “carbon footprint arbitrage” and argued that India’s coal footprint should be retained by Sembcorp even after the sale.

Ulf Erlandsson, the founder of the nonprofit, said the deal was one of the first examples of a green bond issuer effectively changing the premise on which it was issued, moving an asset carbon-intensive off-balance sheet while continuing to finance it. “Nothing really happens except they try to reduce their carbon footprint,” he said.

Bond investors could be incentivized to push issuers to account for carbon on their balance sheet rather than “hide everything under the rug”, he argued, because it increases the chance that the coupon will increase if targets are not met. reached.

Sembcorp’s latest green bond, issued in April, yields 3.735%. But under the terms of the deal, the coupon paid would increase by 0.25 percentage points in 2026 if Sembcorp fails to meet its 2025 environmental target. By selling its Indian coal business, Sembcorp said it would meet that target “in advance”.

“The option to retain SEIL [the India coal unit] has been considered, however, this may result in increased interest costs for [Sembcorp’s] sustainability-related financing instruments,” he wrote to shareholders including BlackRock Institutional Trust Company NA, Vanguard and Norges Bank last month.

The IFC said its investment in the bond reflected the World Bank’s plan to align financial flows with the goals of the Paris Agreement. He said proceeds from the bond issue could only be used to finance or refinance renewable energy or other sustainable projects.

Mak Yuen Teen, professor of accounting at the National University of Singapore, said the agreement underlined how “NGOs, banks and investors should ensure that companies do not just use financial engineering to reduce their greenhouse gas emissions.

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